Big 5 Making a Rebound With Handling of Bottom-Line Issues

0

After heavy boardroom drama over the past 18 months, Big 5 Sporting Goods Corp. looks to be showing signs of a rebound.


The El Segundo-based sporting goods retailer hit a rough patch last year when it announced it would restate results from 2001 to 2003, its chief financial officer stepped down and it was slapped with a lawsuit by a shareholder who claimed the company had breached its fiduciary duty.


It all showed in the stock price, which hit a 52-week low of $16.91 on an intraday trade on March 10, before closing at $19.30 for the day.


But the retailer, well known for its ubiquitous newspaper advertisements of low-priced shoes, tennis rackets and other recreational gear, came back with its second successive strong quarterly earnings report in mid August. The stock crept up to nearly $22 last month, though it has since retrenched, closing at $19.92 on Aug. 30.


The driver of the results? Solid sales resulting from an aggressive expansion over the last several years, and improved efficiencies now that the chain has better integrated its new Riverside warehouse into its operations. A better supply of its mainstay close-out merchandise as consumer purchases of full price items tail off amid the slowing economy didn’t hurt either


“We posted both sales and margin gains in each of our major merchandise categories of footwear, hard goods and apparel,” Chief Executive Steven Miller said in a statement. He noted the chain also benefited from sunny weather in many markets, which started the summer sporting goods season early.


The chain added 14 new stores last year and now has 332 locations in 10 Western states, including California, Washington, Arizona, Oregon and Texas. That’s up from more than 260 outlets three years ago, an expansion that has been reflected in its annual revenues, which hit $813 million in 2005, up 22 percent from $667 million in 2002.


However, the top line growth has not been evenly reflected in the bottom line, with the chain reporting $26.5 million in net income in 2005 (its fiscal year technically ended Jan. 1, 2006), down from $33.5 million the prior year.


But earlier this month, the company reported second quarter net income of $7.4 million (33 cents per diluted share), up 21 percent from $6.1 million (27 cents) for the same quarter a year ago. That beat consensus Wall Street estimates by 7 cents a share. Net sales increased $14 million, or 7 percent, to $212 million, and the key indicator of same store sales increased 3 percent for the second quarter.


“The second quarter release reinforces our basic thesis that the (company’s) news flow will continue to improve,” analyst David Magee of SunTrust Robinson Humphrey, who has a buy rating on the stock, stated in a recent research report. “Early third quarter trends are encouraging, and we believe (Big 5) is benefiting from better supply of close-out deals from vendors.”


The company said that the opening of a new distribution center in Riverside increased expenses but it improved store-level efficiencies. That’s expected to continue and given Big 5’s business model, it should be a particular boost. The retailer operates a wider network of full-line but smaller stores than several of its competitors.


“We are confident that we will realize greater efficiencies in our distribution center operations as we move forward,” Miller said. However, Wall Street still seems unconvinced, with 10 of 16 analysts who cover the company rating it a hold, five a buy and one a sell reflected in the still less-than-stellar stock price.


But the analysts’ general consensus is that the company is in the early stages of recovery, with many raising their third quarter projections to match the company’s guidance of 32 to 36 cents. Analyst Jeff Sonnek of Friedman Billings Ramsey, who has a hold rating on the stock, blamed the company’s unwillingness to raise its own earning estimates on fiscal conservatism. Just a year ago, though, the company was still dragged down by its financial missteps.


Big 5 didn’t file its 2004 annual report until September of last year after it found an error in its accounts payable in its 2001, 2002 and 2003 fiscal years that resulted in a net income reduction of nearly $5 million. The late filing also caused repeated de-listing threats from the Nasdaq, and shortly thereafter shareholder William Childers filed a lawsuit accusing the board of directors and executive officers with a breach of fiduciary duties. The case recently settled, subject to court approval.


The problems caused the company to increase its expenses for audit and legal fees. However, in the latest quarter selling and administrative expenses as a percentage of sales dropped to 28 percent from 29 percent. The improvement was largely thanks to a $1.4 million reduction in legal and audit fees as the company has moved on from its woes.

No posts to display